Mortgage bonds reached a critical resistance level and were pushed down sharply. This happened just after we received the strongest Consumer Sentiment report in 11 years. Not only did this push mortgage bonds below their trend line, it also pushed the 10 Year Treasury Note yield above the 1.78% level we identified yesterday. We talk a lot about trend lines and channels. It is through trends that we are able to predict movements in the market. Once a trend line has been broken, unless markets recover today we could see rates deteriorate. Now this doesn’t mean that rates won’t move lower again in the near future. However, it means that we will likely see some deterioration to mortgage pricing in the near term.
December’s CPI (Consumer Price Index) was reported this morning to be -0.4%. Core CPI (which eliminates food and energy) was unchanged. This important indicator shows that year over year CPI has dropped from 1.3% down to 0.8% and Core CPI fell from 1.7% down to 1.6%. This is far below the Fed’s target of 2%-2.5%. Therefore, this make a Fed rate hike less likely in the near term. While most are certain we will see a Fed rate hike by October, with most believing it will happen in June, we’re not so sure. With virtually no inflation in the markets, and will very little wage growth, a rate hike could create more damage in the markets and erase much of the gains we have made the past couple years. This is not something the Fed wants to see happen.
With mortgage bonds falling sharply, we are in locking mode. As mentioned above, we have broken beneath support and the next support level is a ways below current levels. This will pressure mortgage rates higher until they are able to find support, which could be 100 basis points below where the market opened up this morning.